Traders in crude oil futures at the New York Mercantile Exchange were busy Wednesday in response to Katrina.
(Bloomberg News Photo)

FINANCIAL MARKETS

Aftermath may include higher oil prices

Analysts predict Gulf shutdown will spur increase

By Justin Bachman, Associated Press | August 29, 2005

NEW YORK -- With crude oil prices already at record levels, Hurricane Katrina targeted the heart of America's oil and refinery operations yesterday, shutting down an estimated 1 million barrels of daily production and threatening to curtail refining activity in the region.

Katrina, a Category 5 storm expected to strike near New Orleans early today, was churning through the Gulf of Mexico. The area is crucial to the nation's energy infrastructure -- offshore oil and gas production, import terminals, pipeline networks, and numerous refining operations throughout Louisiana and Mississippi.

The hurricane followed a path similar to the one taken last September by Ivan, which caused heavy damage and reduced the region's output for months.

Oil companies have evacuated their workers from Gulf facilities. The Louisiana Offshore Oil Port, which processes loads from tankers too large for mainland ports, evacuated all workers and stopped unloading ships on Saturday morning said Mark Bugg, the terminal's manager of scheduling. The LOOP, 20 miles offshore, is the nation's largest oil import terminal and handles 11 percent of US oil imports.

''It's not looking real friendly here. This is unmitigated bad news for consumers," said Peter Beutel, president of the energy market tracking firm Cameron Hanover.

Gasoline prices could see the largest increases because so many refineries in the region could be shut down by flooding, power outages, or both, energy analysts said.

The United States has ample crude oil supplies, even if major hurricane destruction trims Gulf oil output and foreign imports, but refining capacity is extraordinarily tight. As a result, prices for gasoline, heating oil, jet fuel, and other products have flirted with records and could go even higher this week. ''If this thing knocks out significant quantities of refining capacity . . . we're going to be in deep, dark trouble," said Ed Silliere, vice president of risk management at Energy Merchant LLC in New York.

The market has been on edge for months, with traders and speculators buying on the slightest fear. With Katrina, all those fears could be realized, Beutel said.

''Basically I could spill a can of oil at my local gas station and you'd see the price of crude go up by $1 per barrel," he said, predicting that futures would probably top $70 per barrel in coming sessions. Crude settled at $66.13 a barrel Friday on the New York Mercantile Exchange, down $1.36 after hitting $68 last week.

In many ways, Katrina was expected to be inconsequential to the energy industry, with many traders selling on Friday as the storm moved across Florida and was seen as moving north and striking the Florida Panhandle as a tropical storm with little impact. That all changed Saturday, when the system gained power and charged west, directly into areas of offshore oil production.

ChevronTexaco Corp. completed evacuations of all workers in the eastern and central Gulf of Mexico and nonessential workers in the western Gulf late Saturday, company spokesman Matt Carmichael said.

Chevron has about 2,100 employees and contractors working in the Gulf, Carmichael said. Chevron will continue to produce 90 percent of its normal production by remote as long as weather cooperates, he said.

Royal Dutch-Shell Group evacuated more than 1,000 offshore workers by Saturday. Only those in the far west remained, the company said on its website. BP PLC and ExxonMobil Corp. also brought workers ashore Saturday.

Shell estimated that 420,000 barrels of oil and 1.35 million cubic feet of gas per day will be shut in at its central and eastern Gulf facilities. Exxon Mobil said it has ceased daily production of 3,000 barrels of oil and 50 million cubic feet of gas.

Valero Energy Corp. evacuated all except a few workers at its 260,000-barrel-a-day St. Charles refinery on Saturday. Murphy Oil Corp. also shut down its 120,000-barrel-a-day Meraux, La., refinery, and Exxon Mobil Corp. planned to shut down its 183,000-barrel-a-day refinery in Chalmette, La.